AMP Capital has lowered the performance target for its $2 billion NZ fixed income fund ahead of a benchmark switch next year.
As reported last month, AMP Capital will shift to a Bloomberg composite local fixed income index next January rather than the standard NZ government bond benchmark. Following the change, the outperformance target for the NZ fixed income fund will drop from to 50 basis points (bps) from the current 75 bps.
In a note to clients, AMP Capital says: “… by changing to a composite benchmark which includes government and non-government securities (permitted in the Fund guidelines), some of the extra yield premium from switching from government bonds into non-government bonds, that would have previously been captured as part of active management, is now included in the benchmark.
“As a result, we have adjusted the active management target to take account of the premium earned by taking on credit and liquidity risk now captured in the benchmark.”
Warren Potter, AMP Capital portfolio manager, said a three-tiered analysis suggested the performance adjustment to reflect the new benchmark should be in the order of 30 bps “but we settled on 25”.
Potter said the benchmark comparison included analysing yields, total return and the “option-adjusted spread” of the government bond and composite indices since 2010.
The performance target change would set more realistic outcomes given the NZ fixed income market and actual mix of assets in the AMP Capital fund, he said, while also recalibrating internal remuneration targets.
Despite the index change AMP Capital would continue to manage the fixed income fund in the same way, Potter said.
“We have a large degree of flexibility in how we invest,” he said. “There’s broad discretion to take active management positions around the index.”
Currently, the fund is close to benchmark.
Potter said AMP Capital was the first to move to a composite index but expected others were considering a change. He said the move better reflects actual investment practice and aligns with global trends.
According to the latest Melville Jessup Weaver (MJW) investment survey, most managers benchmark to the NZ government bond index for their core fixed income offerings. However, Harbour Asset Management manages to a 50/50 mix of NZ government and corporate bond indices.
Last week AMP Capital also beefed up its NZ fixed interest team with the appointment of Carrick Lucas.
Lucas, previously Kiwibank portfolio and liquidity manager, takes up an expanded fixed income analyst role at AMP Capital.
In a statement, Vicky Hyde-Smith, AMP Capital NZ head of fixed income, said: “A combination of regulatory changes and growth in assets, particularly from life insurance clients, has increased the demands on our fixed income team.
“This re-scoped position recognises our commitment to work with clients to deliver exceptional investment solutions for our clients, and complements the skills of AMP Capital’s well-recognised Fixed Income team of Warren Potter, Tim Mowbray and myself. I look forward to welcoming Carrick in the new year.”
Lucas starts his new role next January.